In our experience, personalities of high net worth individuals range from the overly cautious to the cavalier. Perhaps not surprisingly, the cautious client will opt for maximum coverage and the cavalier client will keep coverage to a minimum. “If it happens, it happens,” this client might say.
But if you are like most people, you will fall somewhere between these two personality extremes. Still, you may be underinsured for the simple reason that you have not contemplated how bad it can get “if it happens.” So bad, in fact, that your existing home and auto policies will not cover a settlement amount.
TO DETERMINE IF YOU NEED UMBRELLA COVERAGE, LET’S BEGIN BY ASKING:
- Do you own multiple residences, autos or watercraft?
- Are trusts and LLC owners of real property covered by your current insurance program?
- Do you sit on any not-for-profit boards of directors?
- Do you have teenage daughters or sons?
- Do you employ full-time domestic staff at any of your residences?
- Do members of your household use the internet, in particular social networks?
If you answered “yes” to some or all of these questions, the answer to whether you need umbrella coverage is also likely “yes,” and it points to a stark reality for the affluent: This country has never been more litigious than it is now, and since you have, or appear to have, the means to pay settlements, you may be a prime target for litigation. Simple as that. So:
If your daughter makes a career-damaging claim about her soccer coach on Facebook, you could be ordered to pay a settlement. The same could happen if you let your 65-year-old live-in housekeeper go, and she files an age discrimination suit.
Or the renter of one of your residences gets hurt and files a negligence suit. Or the nonprofit where you are a board member gets sued, loses and has inadequate insurance. You could be held personally liable for the difference.
High net worth families and individuals with umbrella coverage have a better chance of keeping their assets intact.
We are not here to push panic buttons, but to say that as a high net worth family, you could be liable for payouts astronomical enough to jeopardize your estate and force you to liquidate assets. That’s not being an alarmist, that’s being a realist.
To protect those assets, different coverage options may be available through what is called an “endorsement,” which amends the policy’s terms. For example, by endorsement through one of a few affluent carriers that specialize in providing personal lines insurance for high net worth individuals, you may be able to add employment liability coverage for your domestic staff, or coverage to protect you personally while you act as a director on the board of a not-for-profit organization.
SO, HOW BIG SHOULD YOUR UMBRELLA BE?
While your net worth matters, your exposure is just as important: More autos, homes, domestic staff, not-for-profit board memberships and teens online equals more exposure. Identify areas where you are most likely to have a loss, the probable magnitude of such losses combined with your current financial position and how such losses could impact your financial position.
Umbrella policies are available in million dollar increments up to $5 million and in $5 million increments up to $100 million. Defense costs are covered over and above, and not subtracted from, the limits of your policy. Finally, some high net worth individuals feel that increasing coverage produces more “low-hanging fruit,” encouraging more lawsuits and bigger payouts. But, juries are typically not made aware of the amount of insurance carried by a defendant.
In short, high net worth individuals with umbrella coverage have a considerably better chance of keeping their assets intact.
Insurance services provided through NFP Property & Casualty Insurance, Inc., a subsidiary of NFP Corp. Doing business in California as NFP Property & Casualty Insurance Services, Inc. (Calif. License # 0F15715).
This article was originally published in the June/July 2016 issue of Worth.